In the increasingly decentralized landscape of digital money, banks face the challenge of staying the trusted gateway for their customers. This is complicated by faster and more efficient transactions outside the current banking system, the emergence of specialized players offering new investment and service opportunities, and a growing fragmentation of various forms of digital money.
Gateway
To maintain and expand on their customer relationship capital, banks need to define how they can become the gateway into the world of digital money for the broader market and society at large. This requires a transition from being the trusted, central owner, and facilitator of transactions to becoming an access point to a decentralized public infrastructure, which complies with the highest regulatory, legal, and ethical standards.
Strategic Opportunities
This project mirrors the idea of an open, collaborative, and inclusive financial system by creating a unique and first of its kind setup. We adopt an open public-private partnership model to collaboratively explore user-driven, technological, and regulatory requirements and opportunities for banks that seek to become the central access points for their existing and future customers to an increasingly decentralized world of digital money. The goal of this project is to jointly define foundational standards and requirements that apply to the banking industry at large yet allow each banking participant to leverage their user/customer base and develop new revenue/business models. Our initial hypotheses are that such standards and requirements will evolve around (1) common identity and KYC services and standards, (2) on-chain privacy and selective disclosure, and (3) on-chain transaction monitoring.
Objectives
The European Union focuses on the public decentralized infrastructure for Digital Euro and central bank digital currencies (CBDCs). The project is open to all banks and partners in this space and designed as a community-experiment to build on existing knowledge, while generating new insights, ideas, industry standards, and partnerships.
We propose a lean experiment design to formulate and validate hypotheses and gain practical experience on how decentralized digital money can change the role of commercial banks. The results from this experiment will be applicable to improve the existing- and develop new commercial bank business models surrounding both private (e.g. stablecoins) as well as public (the Digital Euro) forms of digital money. Learnings from prior initiatives show that for successful experimentation public-private, low-barrier, and open-source collaboration is required whilst ensuring compliance to regulatory demands. The time to experiment is now to drive change for the future of banking.
The goal of this project is to collaboratively establish foundational standards and requirements that can be applied universally across the banking industry, while still enabling individual banks to leverage their existing customer bases and innovate with new revenue streams and business models. This experiment aims to create a framework that balances the need for industry-wide interoperability and security with the flexibility to cater to the unique needs of different financial institutions.
We expect the development of standards and requirements will focus on three critical areas:
- Common identity and Know Your Customer (KYC) services and standards;
- On-chain privacy and selective disclosure mechanisms;
- On-chain transaction monitoring.
These focus areas are crucial in bridging the traditional financial systems with decentralized digital infrastructures, particularly in the context of Central Bank Digital Currencies (CBDCs) and decentralized finance (DeFi) applications.
Technological Guidelines
Our experiment will adhere to several guiding technological principles to ensure transparency, scalability, and inclusivity in developing decentralized financial infrastructure:
- 100% Open Source
- Open participation
- Progressively Decentralized Governance
Ecosystem
Commercial banks and regulators: take decisive action to shape a future-ready and safe, decentralized financial infrastructure where your role is impactful and essential. Join our robust public-private partnership to drive efficiency, transparency, and inclusivity in the financial ecosystem. Contact Igor Mikhalev to become part of this transformative initiative.
The full version of the paper can be accessed here.